Common red flags to identify fraud

These are broken down into three groupings: common personality traits of fraudsters, common sources of pressure, and changes in behavior.

COMMON PERSONALITY TRAITS OF FRAUDSTERS

Live beyond their means.
Have financial difficulties.
Have a wheeler-dealer attitude.
Are domineering and controlling.
Have an unusually close relationship with customers or vendors.
Express irritability, suspiciousness, or defensiveness.
Do not like people reviewing their work.
Have a strong desire for personal gain.
Have a “beat the system” attitude.
Have control issues and unwillingness to share duties.
Refuse to take vacations.
Often work excessive overtime.
Complain about inadequate compensation.
Outwardly appear to be very trustworthy.
Work performance is often “too good to be true.”
Often display some sort of drastic change in personality or behavior.
Are unable to relax.

COMMON SOURCES OF PRESSURE

Medical problems — especially for a loved one.
Unreasonable performance goals.
Spouse loses a job.
Divorce or family problems.
Starting a new business or current business is struggling.
Criminal conviction.
Legal problems.
Excessive pressure from within the organization.
Excessive family or peer pressure for success.
Instability in life circumstances.
Purchase of a new home, a second home, or a home remodel.
Needs to maintain a certain lifestyle (e.g., “champagne tastes”) or outdo others in regards to material possessions (e.g., “keeping up with the Joneses”).
Excessive gambling.
Drug or alcohol addiction.

CHANGES IN BEHAVIOR

Suddenly appears to be living a more expensive lifestyle.
Starts to carry unusual amounts of cash.
Appears to be buying more items — houses, cars, boats, clothes, jewelry, electronics, etc.
Brags about new purchases.
Creditors and bill collectors show up at work or call frequently.
Borrows money from co-workers.
Becomes more irritable or moody.
Becomes unreasonably upset when questioned.
Becomes territorial over his or her area of responsibility.
Will not take vacation or sick leave or only takes it in small increments.
Works unnecessary overtime.
Turns down promotions.
Starts coming in early or staying late.
Redoes or rewrites work to “make it neat.”
Mentions family or financial problems.
Exhibits signs of a drug or gambling addiction (e.g., absenteeism, becomes manipulative, looks ill, inconsistent or illogical behavior, loss of sleep or appetite).
Exhibits signs of dissatisfaction (e.g., decrease in productivity, change of attire, irregular schedules, frequent complaining about inequities, or work issues).

Note that these are only warning signs that may indicate that the risk for fraud is higher rather than actual evidence that fraud is occurring. The existence of one or two flags is not something to be overly concerned about as many employees can demonstrate one or more. However, if multiple flags are present that span the three groupings and accounting irregularities or weak controls are identified, then additional investigation should be performed by a qualified auditor or fraud investigator.

Source: The Institute of Internal Auditors www.theiia.org